Glossary > Velocity Pricing

Velocity Pricing

Reviewed By Eyal Orgil Updated September 24, 2024

What is Velocity Pricing?

Velocity pricing is a pricing strategy that adjusts the price of a product based on its sales velocity, or the speed at which it sells. The core idea is that products with higher sales velocities (fast-moving items) are priced lower, while slow-moving items are priced higher.

As a basic example, the process looks something like this:

You have an item priced at $50.
Your goal is to sell 10 in the first hour, with a lower limit of 5.
If you don’t sell at least 5 in that first hour, you’ll lower the price to encourage sales.
If you sell more than 10, you’ll raise the price to capitalize on the demand.

This approach to setting optimal prices operates on the premise that prices should be responsive to a product’s performance in the market. By constantly monitoring and adjusting prices based on the sales velocity, businesses aim to maximize revenue and profits.

Big data and advanced analytics are required for this. Dynamic pricing algorithms have to adjust prices based on factors like sales history, market trends, and real-time inventory levels.

Synonyms

Dynamic pricing based on sales velocity
Sales velocity pricing
Velocity-based pricing

Benefits of a Velocity Pricing Strategy

In the early stages of bringing your product to market, basing your pricing on real-time sales data is one of the best ways to optimize pricing for your business.

By testing and adjusting prices based on sales velocity, a company finds the market’s upper and lower pricing limits — the highest price, where demand doesn’t fall, and the lowest price that offers an acceptable margin. This guarantees they aren’t leaving money on the table from underpricing or risking losing sales from overvaluing a product.

Using velocity-based pricing also facilitates close alignment with inventory management. When businesses can distinguish high-velocity items from low-velocity ones, they reduce the potential for stockouts and overstock situations.

By offering competitive prices on popular items, you’re improving customer satisfaction. And by increasing the margins on low-velocity items, you’re offsetting some of the carrying costs you incur from not selling them as quickly.

That said, velocity pricing is best used as a testing mechanism in the early stages, when you haven’t yet established an accurate pricing strategy.

Once you understand your target market’s price sensitivity and find a solid price for your product, you should still experiment periodically. But you shouldn’t continue to make changes purely based on sales velocity, as your growing customer base could find it (a) too variable and (b) discriminatory.

Sales Velocity Pricing Factors

When it comes to implementing a velocity pricing strategy, there are several factors you have to consider:

Product Demand

The core metric for velocity pricing is how quickly items are selling. This can be measured by the number of units sold over a certain period, such as daily or weekly.

Product demand is, of course, subjective. There will inherently be greater demand for certain products, such as new or highly sought-after items. There will also naturally be a smaller market for items that aren’t required for everyday use or those using a premium pricing strategy. Consider the product type, its price point, and buyers’ buying habits before reacting to market fluctuations.

Sales cycle time is another consideration. If your product entails a longer decision-making process, you have to extend the time frame you use for measuring sales velocity. In B2B sales, for example, you’ll want to implement velocity-based pricing on a month-to-month or quarterly basis instead of weekly or daily, like you would for DTC ecommerce.

Inventory Levels

If you’re selling out of a product quickly, it’s an indicator that you’ve achieved product-market fit. But it also tells you there’s probably room for increasing the price to capitalize on the demand.

If inventory has been sitting on shelves for an extended period or isn’t moving at all, a price reduction could help boost sales. Or, if it’s a premium product

Competition

When looking at your competitors, you should ask yourself two questions:

Is the market already saturated with similar products?
What do comparable items sell for, and why?

If you’re selling in an already crowded market, customers have almost certainly become accustomed to paying a particular amount for a product like yours. While you may still be able to implement velocity pricing, the limited demand could prevent you from varying your prices significantly.

Seasonality

If you sell seasonal products, you’ll want to raise or lower your prices according to the sales velocity for a particular season. For example, you may sell holiday decorations at higher prices leading up to Christmas because of increased demand, but lower them after the holidays as customers are less likely to purchase.

In this case, the hard part of determining when and how much to raise prices is already done for you.

Product lifecycle stage

You have to ask yourself whether the product is new, established, or nearing obsolescence.

Newer products have lots of room for pricing experimentation because they don’t have an established customer base or status quo yet.
Established products require a more careful approach to price changes because customers have become accustomed to paying a particular amount. You will frustrate customers who pay higher prices if they see the product discounted shortly after their purchase. Or, you’ll train them to wait for lower prices, thereby devaluing your product.
Nearing-obsolescence items should be priced to sell quickly. Since lower prices generally incentivize higher velocity, and demand will likely decline over time, you can’t afford to have too many units left when it’s time to introduce a newer version of your product.

Product Type

At the end of the day, how you raise or lower prices to drive demand will largely depend on whether you’re selling something exclusive, high-quality, basic, or expendable.

Long-term, velocity pricing is viable for items that don’t have any competitors. Since it’s the most ‘seller-customized’ pricing strategy, it works best when your customers are only interested in one brand (yours), eliminating the need for price comparison.

It’s effective for companies with large product catalogs compared to niche products. It also works in industries where demand-based pricing is commonplace — hospitality, travel, and transportation.

In retail, a toned-down version of velocity pricing (where items are discounted after X amount of time to complete sell-through) works best for items that don’t have an expiration date. Apparel, furniture, and electronics are top candidates for this pricing strategy.

Keep in mind you can use velocity pricing to control how customers perceive product value. Since slow-selling items generally have higher prices and fast-selling items are priced lower, you can use pricing to preemptively control the demand for your product, based on where it’s positioned in the market (e.g., luxury vs. budget-friendly).

Determining Pricing Based on Sales Velocity

Determining prices based on sales velocity requires you to align the pricing strategy with your overall business goals.

Follow this step-by-step process to implement velocity pricing:

1. Calculate sales velocity.

Sales velocity measures how quickly your business generates revenue from sales. The formula is:

Sales Velocity = (Number of Deals × Average Deal Size × Win Rate) / Sales Cycle Length

You can find this data in your CRM and other sales tools. From there, use the formula to determine the revenue generated per unit of time.

2. Segment your products.

You want to separate your products into high-velocity products (those that sell quickly) and low-velocity products (those that don’t). This step will help you determine which products will receive discounted pricing and which will have a higher price point in your overall strategy.

3. Analyze costs and market conditions.

Calculate fixed and variable costs for each product. Then, analyze competitor pricing and market trends to understand where your product stands in the market. This shows you whether your price is competitive or if you have room for adjustment.

4. Set initial prices based on velocity.

Set lower prices for fast-selling products to encourage sales. Set higher prices for low-velocity products to increase your profit margins, maximize revenue from slower-moving inventory, and discourage overstocking.

5. Adjust based on additional factors.

Velocity isn’t the only thing that represents your product’s value. Also consider:

Price elasticity
Customer segmentation
How you want the market to view your product (e.g., cheap vs. high-quality)
Cost factors (to ensure profitability at all price points)

6. Implement and monitor.

Implement the velocity-based prices across your sales channels. Regularly track sales data to see how the new pricing strategy affects revenue and profitability. Be prepared to adjust prices based on ongoing analysis and market changes.

Using Technology for Velocity Pricing

Technology can play a significant role in implementing and monitoring velocity pricing. With the right tools, you can easily collect and analyze data to determine sales velocity, segment products, and make informed pricing decisions.

Some key technology solutions that can support your velocity pricing strategy include:

CRM — Use your CRM to track and analyze sales data, including number of deals, average deal size, win rate, and sales cycle length.
Sales enablement tools — Sales enablement helps your sales team quickly access and share product information, pricing guidelines, and quote configuration to ensure consistency in pricing across all channels.
CPQ (configure, price, quote) — CPQ automates the pricing process and ensures accuracy and consistency in quotes, even with complex pricing models. DealHub CPQ supports dynamic pricing.
Data analytics tools — Use analytics platforms to track sales data, monitor market trends, and analyze customer behavior to inform pricing decisions.
Competitor monitoring tools — Keep an eye on competitor pricing strategies and adjust you own accordingly to remain competitive in the market.
Inventory management systems — If you sell physical products, use your inventory management system to track product levels and make informed decisions on discounting slow-moving inventory.
Dynamic pricing software — Utilize dynamic pricing software to automatically adjust prices based on real-time market data and demand.
Ecommerce platforms — Some ecommerce platforms support velocity pricing strategies, meaning you can list your products and have the site dynamically update them based on sales, with a higher and lower limit to protect your profit margins.

Key Takeaways on Sales Velocity Pricing

Velocity pricing is a dynamic strategy that can help businesses maximize revenue and profit by strategically adjusting prices based on the speed at which products sell.

A few points to remember:

Velocity pricing is a demand-based strategy that takes into account how quickly products sell.
To implement velocity pricing, calculate sales velocity, segment products into high- and low-velocity categories, analyze costs and market conditions, and adjust prices accordingly.
Use your CRM, CPQ, data analytics tools, inventory management systems, and ecommerce platforms to support your velocity pricing strategy.

Keep in mind that velocity-based pricing is most likely to be successful when companies have a large enough portfolio of products that can be classified into high- and low-velocity categories. For niche products or those newer to the market, it’s better to use it as a testing mechanism to find the optimal price.